Tuesday, July 28, 2015

In the mainstream media,
we keep hearing about the strength of the United States economy. Growth
is reasonable, headline unemployment rates have reached relatively healthy
levels and the dollar is strong. That said, the world's commodities are
having a terrible year.

Let's open by looking at
what makes up the Commodity Research Bureau Index or CRB. The CRB was
founded in 1957 and follows the index of commodity futures. Over the
decades, it has been revised several times to reflect commodity market
evolution. It currently consists of 19 commodities with the CoreCommodity CRB
Index having the following weightings:

The most recent revision
was in 2005; this revision changed from an equal weighting for all components
to a four tired group system that was designed to reflect the significance of
each commodity as follows:

Precious Metals: 7
percent

Base and Industrial
Metals: 13 percent

Energy: 39 percent

Agriculture 41 percent

Here is a chart showing what has happened to
the Reuters/Jefferies Commodity Research Bureau (CRB) Index since February
2008:

The CRB Index high point
over the last eight years (since just prior to the Great Recession) was
473.9669 in July 2008 and the low point was 200.1563 in February 2009. The
current index at 205.04 is well below the 8 year average of 296.98 and at its
lowest level in more than six years. As well, the CRB has dropped by
44.65 percent from its post-Great Recession high of 370.47 at the end of March
2011.

Here's what has happened
to the CRB over the past year:

At the end of July 2014,
the CRB was at roughly 298. On a year-over-year basis, the CRB Index has fallen by 31.2 percent and has dropped by 10.1 percent since the first trading day of 2015.
Obviously, with the weighting given to oil, at least some of this
commodity collapse is due to the falling price of oil but there is more to the story than just oil.

I find it particularly
fascinating that, even with the world's central banks increasing the world's
monetary base through quantitative easing and other imaginative monetary
programs, all of that cash seems to have left the commodities markets,
seemingly with a preference for both stocks and bonds which have left stock
markets overvalued and bond markets extremely fragile, particularly when
interest rates rise.

Let's take a look at one
key commodity that, while it gets less attention than oil, is often considered
to be a bellwether for the world's economy, thus, the nickname "Doctor Copper". Hereis a chart showing what has happened
to the price of copper since mid-2005:

Over the past eight
years, copper has ranged in price from a high of $4.625 on July 11, 2007 to a
low of $1.250 per pound on December 23, 2008 with an average of $3.375 per
pound over the entire period. After the so-called end of the Great
Recession, copper hit a high of $4.623 per pound on February 14, 2011.
Copper traded above $3.00 per pound until mid-March 2014 and then began
to show greater signs of weakness in December 2014 when it consistently traded
below $3.00 per pound.

Here's what has happened
to the price of copper over the past year:

At its current level of
$2.38 per pound, copper is down $0.87 per pound or 26.9 percent on a
year-over-year basis and is down 48.5 percent from its post-Great Recession
peak in February 2011. "Doctor Copper" is certainly suggesting that the world's economy is heading for a slowdown.

For those of us that
watch commodities on a regular basis, the recent very significant decline in
the price of many of the globe's key commodities suggests that the world's
economy is teetering on the edge of an economic contraction, particularly given that many of the commodities in the CRB index are building blocks of a healthy and growing economy. Certainly, some of the drop in prices for commodities can be laid at the feet of a strong U.S. dollar which has made it substantially more expensive for holders of other currencies to buy these same commodities, an issue that has put at least some downward pressure on demand. However, even if
things are looking rosy for the United States economy, the flagging economies
of both China and the European Continent would suggest that all is not well in this globalized world, just
as the world's most powerful central bank is considering a dovish monetary
policy stance.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.